In banks we used to trust

Chris Tobe, CFA, CAIA is a top expert on pension and 401(k) investing and is
an Senior Investment Consultant with the Hackett Group. He has been quoted
frequently on Stable Value in 401(k)s in the Wall Street Journal, Barron’s and
dozens of trade magazines and is working on a book on Stable Value. His recent
book on public pensions “Kentucky Fried Pensions” has been featured in the New
York Times and Rolling Stone.

For over a century bank trust departments fulfilled an important role as fiduciaries and foundations for financial stability within families, churches and other charitable institutions.

But in the past couple of decades, short-term corporate and Wall Street greed stripped many communities of this valuable cornerstone, the dependable bank trust department. Most of the mega banks have gone this direction in varying degrees and some small-bank trust companies have sprung up to fill the void.

I spent most of the first 10 years of my career in two bank trust departments, in the late 80s and early to mid 90s, and found it to be rewarding for both myself and our clients. Families and charities would have the same reliable trust account for decades. They would receive solid returns, reasonable transparent fees and a team of trust experts to guide them on legal and estate issues, tax issues and investments. Each client was given personalized service by real experts to meet their needs. Fortunately I left before the banks I worked for were gobbled up; first by one big bank and then by an even bigger financial institution who put them on the road, in my opinion, to fiduciary destruction.

“A trustee is required to uphold a strong level of integrity and impartiality in conducting its duties. Typically, a trustee isn’t permitted to benefit or profit from its position unless the trust document specifically allows for payments to the trustee for providing services. Often, a trustee may have a fiduciary responsibility to the trust beneficiaries.”
Investopedia

Most large bank trust departments are supposedly regulated by the Office of the Comptroller of the Currency (OCC). The OCC for the most part has focused on bank lending practices and transaction accounts and has for the most part ignored trust departments. Since harmful trust practices don't hurt the bank — just the clients — the OCC seems content to let victims take up any grievances under state fiduciary laws on their own.

I saw the first wave of fiduciary destruction from around 1995-2005 with the decimation of trained fiduciaries to protect the client. Many of the large merged banks started breaking the fiduciary promise by stripping the trust departments of their legal, investment, tax and fiduciary expertise. This was done by drastic drops in head count — with those remaining expected to generate sales first, and look after clients second.

The second wave from 2005-present was made possible by the first wave that stripped any pretense of fiduciary duty for the clients. The standards were lowered in some large banks to retail brokerage standards of suitability, which in practice turned to maximizing revenues ahead of the client. Any pretense of impartiality was thrown out the window as clients were forced into more profitable proprietary products in clear cases of self-dealing.

Leveraged products many times held in overseas tax havens with layers of hidden fees would have never passed the fiduciary smell test of previous trust officers. However as the corporate pressure for earnings growth grew, these unsuitable higher-fee and higher-risk alternative assets were sold or even just forced into accounts in which they didn't belong.

There are still good old-fashioned trust departments around the country, mostly in smaller to midsize banks and some independent ones as well. What to look for are qualified people in your town that will work directly with you. Look for lawyers, CPA's and investment professionals with CFA designations that you can talk directly to and will work directly on your account. Some markets will take accounts as low as $200,000, but in almost every market you can find a trust alternative for any block of assets over $1 million. However, since trusts last for decades, there are still some stuck in the newer mega-bank mutations of a trust department and must turn to the courts to escape.

As a young trust officer, it was typical of a businessman or professional to set up a trust for their widow and sometimes children. While they may have handled their investments while alive, many felt that they didn't want to expose their grieving widows to endless sales calls from unscrupulous brokers, who in many cases churned accounts and did hard sells on proprietary products. Most felt they created a fiduciary shark cage protecting their family's assets.

Many of these men would be rolling over in their graves. Not just because the fiduciary shark cages had been dismantled — but the bankers they trusted had morphed into sharks themselves pushing proprietary products.

The OCC needs to step up and protect these legacy trusts immediately from harmful, unsuitable investments and create a regulatory environment that will help end self-dealing and bring back trust to trust departments.

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